Stimulus: Still Not Working!

November 23, 2010

When the American Recovery and Reinvestment Act was signed on February 13, 2009, it became the biggest spending bill in the history of the country, says Veronique de Rugy, a senior research fellow at the Mercatus Center at George Mason University.

The stimulus was divided into three main pieces: $288 billion in tax benefits such as a refundable tax credit; $272 billion in contracts, grants, and loans (the shovel-ready projects); and $302 billion in entitlements such as food stamps and unemployment insurance.

The idea behind the stimulus was that this money would not just be a subsidy to those in need; it would revive the economy through a multiplier effect.

Models by White House economists forecasted that without the spending, the unemployment rate would increase from 7 percent to 8.8 percent. Since then the U.S. economy has shed another 2.5 million jobs and the unemployment rate has climbed to 9.6 percent, says de Rugy.

The stimulus isn't working because it is based on faulty economics.

Using historical spending data, the Harvard economist Robert Barro and recent Harvard graduate Charles Redlick have shown that in the best case scenario, a dollar of government spending produces much less than a dollar in economic growth -- between 40 cents and 70 cents.

They also found that if the government spends $1 and raises taxes to pay for it, the economy will shrink by $1.10.

There are other reasons the stimulus bill has hurt rather than helped the economy. For example, four of every five jobs reported "created or saved" are government jobs.

These injections of cash may provide a short-term boost, but they don't increase economic growth permanently. When the money goes away, the jobs go away too, and so will the artificial gross domestic product growth.

Stimulus spending does not increase total demand. It merely reshuffles it, leaving the economy just as weak as before -- if not weaker, since it also increases the national debt. By trying to ease the pain, the administration may well have made it worse.

Source: Veronique de Rugy, "Stimulus: Still Not Working!" Reason Magazine, December 2010.